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II. Give English equivalents of the following:

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flistnbHicTb ypflAy od6

BMXOAiTH Ha nencito pewwM cno>KMBaHHSi ynpoAOBW

3MIHK>BaTMCfl MlCSlUb 3a MiCH- XOITTS

u,eM BHpiBHKJBaTM cno>KMBanH3

no6iMHO BnnnBaTM Ha cyKyn- rpaHM>nna cxwibi-iicTb flo cno>KM- hmm nonuT BaHHfl

III. Fill in the blanks with appropriate words:

current

transfer

adjustment

lower

income

demand

increase

  1. Saving allows people to ... consumption from the present to the future.

  2. We also save because of uncertainty about our future ... and about how long we will live.

  3. ... consumption will not be based solely on current income.

  4. Investment occurs when real output is used to ... the existing capital stock.

  5. If desired investment exceeds desired saving, firms will find that their inventories are ... than they want them to be.

  6. Increased government expenditure increases aggregate ....

  7. Many different kinds of ... might occur. Prices may change. Interest rates may change.

IV. Read and translate the text:

Aggregate demand and aggregate supply are useful concepts only if they help us understand why an economy may not always fully employ its productive resources, have price stability, or grow at an acceptable rate.

Supply and demand help us organize the way we think about these markets because each directly corresponds to the intentions of self-interested firms or individuals.

Individuals (and economies that are not engaged in international trade) can only do two things with their income: they can consume it or save it.

Individual consumption is directly influenced by individual income.

While consumption is undoubtedly related to income, it is unlikely that consumption will vary exactly as income varies.

Saving is foregone consumption. Essentially, saving allows people to transfer consumption from the present to the future.

When a person's income fluctuates from month to month, he or she can smooth consumption by saving and dissaving and consumption will be based on some expected or average monthly income rather than on actual monthly income.

Aggregate consumption may differ from aggregate real output because an individual wants to save in order to smooth consumption relative to income.

What determines current consumption if we save for retirement? In part, current consumption will be based on our

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best estimate of our lifetime income and how long we expect to live. This kind of smoothing behavior is known as life-cycle consumption behavior.

We also save because of uncertainty about our future income and about how long we will live. We may get sick or injured in some way or we may become unemployed. If we do, our income will fall, perhaps dramatically.

Saving is a way of transferring current income into future consumption. Because of fluctuating incomes associated with our jobs, declining incomes with retirement, and uncertainties about length of life, sickness, incapacitation, or unemployment, individuals will choose to consume some of their current income and save or drssave, thereby smoothing consumption through time.

Current consumption will not be based solely on current income.

Investment occurs when real output is used to increase the existing capital stock or offset depreciation.

If desired aggregate saving exceeds desired aggregate investment, firms will accumulate unwanted inventories. Conver­sely, if desired investment exceeds desired saving, firms will find that their inventories are lower than they want them to be.

Many different kinds of adjustment might occur. Prices may change. Interest rates may change. The production of real output may change. It turns out that with sticky prices, output changes occur before prices fully respond.

Individuals make consumption and saving decisions. Firms make investment decisions. But there is another participant in the economy — the government. Government activities may affect the economy in one of two ways. First, government spending directly affects aggregate demand. Second, go­vernment taxes and subsidies directly affect consumption, saving, and investment and, hence, indirectly affect aggregate demand. Government spending, taxes, and subsidies are the fiscal acti­vities of government.

Increased government expenditure {like increased desired consumption or increased desired investment) increases aggre­gate demand. Decreased government expenditure (like decre­ased desired consumption or decreased desired investment) decreases aggregate demand.

Since consumption expenditures are determined by income, albeit in complex ways, changes in income will also affect consumption. How individuals respond to changes in income turns out to be important. Economists define the marginal pro­pensity to consume (MPC) as the change in consumption per dollar change in income.

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